What characteristics define a variable life insurance policy?

A variable life insurance policy is characterized by its investment component, which allows policyholders to allocate the cash value among a variety of investment options, typically including stocks, bonds, and mutual funds. The critical feature of option C is that the withdrawal value is based on the investment performance of these chosen allocations. As the investments grow or decline in value, so too does the cash value of the policy, making it subject to market fluctuations.

This aspect differentiates variable life insurance from more traditional forms of permanent life insurance, which typically offer a guaranteed cash value. In a variable life policy, there’s no guaranteed minimum cash value as it directly correlates with the underlying investment performance. This introduces both potential for high returns and risk, as the policyholder's cash value can greatly vary depending on investment outcomes.

In contrast to the chosen answer, guaranteed withdrawal values and fixed commissions don’t apply to variable life policies, since these elements are either not features of the design or overly simplistic interpretations of how variable products function. Variable life insurance policies inherently share risks with the policyholder regarding investment choices, thus making the performance of these choices critically important.